Like some of its competitors, XO's sales continued to fall. During the first quarter, the company's revenue was $261 million, down from $286million during the same period a year ago. The company lost $48.5 million during the quarter, compared with $20.5 million a year ago. The company's stock has fallen steadily from about $7.20 a share a year ago to its close Friday at $4.

Since taking control, Icahn hasn't sought to change what the company does. He simply wants it to be bigger.

"There are a lot of" telecom companies up for sale, and "I think there will be opportunities for them to be rolled up," he said in a 2002 interview, a sentiment he echoed in later conversations. Through a spokesman, he declined to be interviewed for this article.

XO's bread-and-butter business is still selling phone service to mid-size companies like Philip Services Corp., a scrap metal recycling company based in Houston that needed phone and Internet service in its 215 locations around the country, and Abra Auto Body & Glass, a car-repair company in Minneapolis that has 60 locations.

There is growing competition for that market these days, said Steve Hilton, an analyst with the Yankee Group in Boston, including from Verizon and the other Bell companies that once were part of AT&T. "The Bells are extremely focused on the small- and medium-sized business space, which wasn't the case prior to the last year," Hilton said.

As the phone giants watch their residential business erode and large corporations cut back on their phone orders, they are re-tuning their marketing to target XO's sweet spot, he said.

But Icahn is tough and likes a good fight. He isn't a frequent visitor to the Reston offices of XO, but typically lets executives run its day-to-day operations, keeping a close eye on the financial statements -- especially the cash that flows in and out, according to XO executives and analysts that follow the company. Icahn and his investment team in New York mostly focus on shopping for good deals, cheap assets that would fit well if merged with a company like XO.

"Even since we announced [the Allegiance] acquisition in February, we've been looking at other companies," mostly smaller, regional companies to augment XO's customer base, Grivner said. With the purchase of Allegiance, the need to acquire is diminished, he said, but the company will continue mulling such deals.

XO was a classic Icahn buy. He quietly bought up enough of its debt to give him control over other creditors. After the company exited bankruptcy, Icahn put Grivner and a number of his own managers in place.

Since then, Icahn has gone after several other big telecom targets, including Global Crossing Ltd. and Cable & Wireless USA Inc., although he lost both to higher bidders.

Before XO starts bidding again, analysts said, it should focus on making the Allegiance merger work.

"They have to execute," said Vik Grover, an analyst with Needham & Co. XO's computers that handle administrative functions like billing and processing new orders were in need of an upgrade, he said. Integrating those functions as well as the sales, advertising and marketing operations with the new company can be complicated, he said.

After the dust settles, though, Icahn may concentrate on buying competitors.

"There is no possible way the number of [small local phone companies] we have in the U.S. can exist in the next two to three years" because they need to be bigger to compete against the Bells, analyst Hilton said. Companies like XO/Allegiance, and the recently merged Broadwing Communications Inc./Focal Communications Corp., which is owned by Corvis Corp. in Columbia, will continue to try to merge with others, he said. In particular, Hilton predicted XO may try to merge with Nuvox Communications Inc., a St. Louis area company which recently combined with NewSouth Holdings Inc. of Greenville, S.C."I don't think anyone can challenge the Bells across the industry," said Royce Holland, Allegiance's founder, who left the company after completing the deal. But a challenger can succeed by focusing on a narrower market, he said, such as serving small- and medium-size businesses. "I think XO is the only one today that has that ability."

Others think Icahn ultimately will do what he has done with other investments in the past: Sell, for a considerable profit.

Going up against the Bells will always be an uphill battle, considering their mammoth size advantage, according to Needham's Grover. "I think the company will eventually go to a Bell," he said.